South African Pension Lump Sums and UK Tax

If you’re living in the UK and planning to take a lump sum from your South African pension fund, there are a few key facts you need to understand - especially around how the payment is taxed, and where.

First Things First: The Tax Treaty Decides Who Gets to Tax What

The UK–South Africa Double Taxation Convention (DTC) gives sole taxing rights to the UK on pension income (including lump sums) when the recipient is UK tax resident at the time the lump sum is received. This means that even though the pension was built up in South Africa, only the UK may tax it under Article 17(2) of the treaty.

However, in practice, SARS will still deduct tax at source using their standard lump sum withdrawal tables. There’s no exemption process unless you secure a 0% directive, which is very difficult to obtain once you’re no longer South African tax resident.

So what happens? You get taxed by South Africa, then taxed again in the UK — and HMRC won’t give you credit for the South African tax, because under the treaty, the UK has sole taxing rights. Your only route to reclaiming the SA tax is by applying directly to SARS for a refund.

UK Tax Treatment

Once you’ve received the lump sum (less the South African PAYE), you must declare it in full on your UK Self Assessment tax return. HMRC then applies UK income tax to it - with one important allowance:

• HMRC allows you to deduct 25% of the lump sum before taxing the rest. This is an administrative practice, not written into law, but has become standard treatment in these cases.

• The remaining 75% is added to your income for the year and taxed at your marginal rate.

  
  

So, if you received a R1,000,000 lump sum, HMRC would disregard R250,000 and tax R750,000 (converted into GBP) as foreign pension income.

Did You Claim UK Tax Relief on the Contributions?

Here’s where things get more nuanced.

If you previously claimed UK tax relief on the contributions to your South African pension (e.g. while you were UK resident), then drawing the lump sum may trigger the Money Purchase Annual Allowance (MPAA). This means:

• Your future UK pension contributions that qualify for tax relief are limited to £10,000 per year.

• This can affect your long-term retirement planning - especially if you continue to contribute to UK pensions.

  
  

If you did not claim UK tax relief on those contributions (e.g. contributions were made while you were living in South Africa), then the MPAA does not apply.

In both cases, the lump sum is still fully taxable in the UK after the 25% deduction. The difference is whether it affects your ability to contribute tax-efficiently to UK pensions going forward.

What You Need to Do

1. Report the lump sum in your UK tax return (75% of the amount, in GBP).

2. Apply to SARS for a refund of the South African PAYE (there’s a process, and it can take a while).

3. Review your UK pension plans, especially if you previously claimed UK tax relief on SA pension contributions.

4. Seek advice before withdrawing, so you can avoid unnecessary tax traps and make sure all reporting is correct.

   
   

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